Section 185 vs Section 186: Can a Company Give Loans to Directors or Group Companies?

Can a company give a loan to its director, subsidiary or group company?
Yes, in certain circumstances—but the Companies Act, 2013 places important restrictions and approval requirements.

For expert guidance on corporate law, ROC compliance and transaction advisory, businesses can consult Chhota CFO.

The two key provisions are Section 185 and Section 186.

To understand the specific restrictions on loans, guarantees and security involving directors, see our guide to Section 185 of the Companies Act, 2013.

Need help determining whether Section 185 or Section 186 applies to your company? Contact us for corporate law support and discuss your requirements with our experts.

Section 185 vs Section 186 — Companies Act, 2013

Particulars	Section 185 – Loan to Directors, etc.	Section 186 – Loan and Investment by Company
What does it regulate?	Loans, including loans represented by a book debt, and guarantees/security in connection with loans	Loans, guarantees, security and acquisition of securities
Persons / entities covered	Directors and specified persons in whom the director is interested	Any person/body corporate, subject to the provisions of the section
General restriction	Company cannot directly or indirectly provide specified loans, guarantees or security to persons covered under Section 185(1), subject to statutory exceptions	Company can undertake covered transactions subject to prescribed limits, approvals and conditions
Loan to director	Generally prohibited, subject to specified exceptions	Section 186 may also need to be considered where applicable
Loan to person in whom director is interested	Restricted, subject to Section 185(2) and specified conditions	May also be subject to Section 186
Loan to subsidiary / holding company	Must be examined based on the persons involved and the specific transaction	Specifically relevant; subject to Section 186 and applicable exemptions
Board approval	Required for permitted transactions under Section 185(2), through a Board resolution passed at a meeting	Required by a resolution passed at a meeting with the consent of all directors present
Shareholder approval	Special resolution required for transactions permitted under Section 185(2)	Special resolution generally required where the prescribed limits under Section 186(2) are exceeded
Statutory limits	No general monetary limit under Section 185; the key issue is whether the transaction is prohibited or permitted	Limits prescribed under Section 186(2), subject to specified exceptions
Interest requirement	No specific general minimum interest-rate requirement under Section 185 itself	Interest on loans covered by Section 186 cannot generally be below the prevailing yield of the relevant Government Security closest to the tenor of the loan
Key compliance focus	Eligibility and prohibition	Limits, approvals, interest and disclosures

Section 185 and Section 186 should not be treated as alternatives. A transaction may need to be tested under both provisions.

Can You Give a Loan to a Group Company?

A loan to a subsidiary, holding company or another group company is not automatically prohibited.

However, the company should examine both Section 185 and Section 186, depending on the facts.

For transactions covered by Section 186, companies should consider:

Board approval;
Prescribed financial limits;
Shareholder approval where applicable;
Interest-rate requirements;
Statutory disclosures; and
Applicable exemptions.

Planning a loan to a director, subsidiary or group company? Contact our experts for guidance on applicable approvals, limits and compliance requirements.

What About a Wholly-Owned Subsidiary?

Certain transactions with a wholly-owned subsidiary receive specific treatment under Section 186, subject to prescribed conditions.

Therefore, simply saying “it’s our subsidiary” is not sufficient. The transaction must still be tested against the applicable provisions.

5 Questions to Ask Before Giving a Loan

Before your company lends money to a director or group entity, ask:

Who is receiving the loan?
Does Section 185 apply?
Does Section 186 apply?
Is Board or shareholder approval required?
Are interest, disclosure and other compliance requirements satisfied?

The Key Takeaway

Section 185 asks: “Is this transaction with a prohibited or restricted person?”
Section 186 asks: “Is the company within the permitted limits and complying with the required approvals and conditions?”

Don’t approve a group-company loan merely because it is an intra-group transaction. Check the Companies Act first.

Have questions about company loans and Section 185 or Section 186 compliance? Get in touch with Chhota CFO for professional guidance and support.

FAQ

What is the difference between Section 185 and Section 186 of the Companies Act, 2013?

Section 185 primarily deals with loans, guarantees and security involving directors and specified persons, while Section 186 covers loans, guarantees, security and investments by companies subject to prescribed limits, approvals and conditions.

Can a company give a loan to its director?

Generally, loans to directors are prohibited under Section 185, subject to specific statutory exceptions and conditions.

Can a company give a loan to a group company?

Yes, a loan to a subsidiary, holding company or another group company is not automatically prohibited. The transaction should be examined under both Section 185 and Section 186, depending on the circumstances.

Does Section 186 apply to loans given to group companies?

Yes. Section 186 is specifically relevant to loans, guarantees, security and acquisition of securities, including certain transactions involving group companies.

Is Board approval required under Section 185?

For permitted transactions under Section 185(2), Board approval is required through a resolution passed at a Board meeting.

Is shareholder approval required under Section 185?

A special resolution is required for transactions permitted under Section 185(2), subject to the applicable provisions.

What are the financial limits under Section 186?

Section 186 prescribes financial limits for certain covered transactions, with specified exceptions. Transactions exceeding applicable limits may require shareholder approval.

Is there a minimum interest rate under Section 185?

Section 185 itself does not prescribe a specific general minimum interest rate. However, loans covered by Section 186 generally cannot carry interest below the prevailing yield of the relevant Government Security closest to the loan's tenor.

Does a loan to a wholly-owned subsidiary require compliance with Section 186?

Certain transactions with wholly-owned subsidiaries receive specific treatment under Section 186, subject to prescribed conditions and applicable exemptions.

What should a company check before giving a loan to a director or group company?

The company should identify the recipient, determine whether Section 185 and/or Section 186 applies, check Board or shareholder approval requirements, and ensure applicable interest, disclosure and other compliance requirements are satisfied.